Polaris 2008 Annual Report Download - page 70

Reconciliation of the Federal statutory income tax rate to the effective tax rate is as follows:
2008 2007 2006
For the Years Ended
December 31,
Federal statutory rate ........................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit ............................ 2.3 2.1 1.7
Domestic manufacturing deduction / Extraterritorial income exclusion ....... (1.1) (1.4) (1.9)
Research tax credit............................................. (1.0) (1.2) (1.3)
Settlement of tax audits ......................................... (0.1) 0.9 —
Valuation allowance for foreign subsidiaries net operating losses ........... 0.5 ——
Other permanent differences ...................................... (1.9) (1.5) (2.4)
Effective income tax rate ........................................ 33.7% 33.9% 31.1%
In 2007, the Company settled with the Canadian income tax authorities related to income tax disputes for the
years 1999 through 2005.
U.S. income taxes have not been provided on undistributed earnings of certain foreign subsidiaries as of
December 31, 2008. The Company has reinvested such earnings overseas in foreign operations indefinitely and
expects that future earnings will also be reinvested overseas indefinitely in these subsidiaries.
Polaris utilizes the liability method of accounting for income taxes whereby deferred taxes are determined
based on the estimated future tax effects of differences between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax laws. The net deferred income taxes consist of the following (in
thousands):
2008 2007
December 31,
Current deferred income taxes:
Inventories ................................................ $ 6,997 $ 5,895
Accrued expenses ........................................... 68,574 57,988
Derivative instruments........................................ 559 1,523
Total current ............................................... 76,130 65,406
Noncurrent net deferred income taxes:
Cost in excess of net assets of business acquired .................... 1,084 3,686
Property and equipment ...................................... (24,189) (15,343)
Compensation payable in common stock .......................... 18,920 17,229
Total noncurrent ............................................ (4,185) 5,572
Total .................................................... $ 71,945 $ 70,978
The Company adopted the provisions of FIN 48 in the first quarter 2007. Polaris had liabilities recorded related
to unrecognized tax benefits totaling $5,103,000 and $8,653,000 at December 31, 2008 and 2007, respectively. The
liabilities were classified as Long term taxes payable in the accompanying consolidated balance sheets in
accordance with FIN 48. Polaris recognizes potential interest and penalties related to income tax positions as a
component of the provision for income taxes on the consolidated statements of income. Polaris had reserves related
to potential interest of $481,000 and $978,000 recorded as a component of the liabilities at December 31, 2008 and
2007, respectively. The entire balance of unrecognized tax benefits at December 31, 2008, if recognized, would
affect the Company’s effective tax rate. The Company does not anticipate that total unrecognized tax benefits will
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POLARIS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)